April 05, 2009

Operations Management – Lesson 7

Storehouse Stock - Drilling Company

Amoco Netherlands Petroleum Company (now BP) operates in the Netherlands, onshore and offshore drilling activity?

As I was the Storehouse Stock Analist during that point in time of my career, I will describe the situation as it was relevant for that period of time.

Purchasing Quantity Decision (Annual Drilling Budget)

Based on ongoing drilling and testing activities combined with geological, geophyscial and seismic survey data, the Drilling Manager developed a "Drilling Budget" for the year which could look as follows;

  1. Exploration Wellss         3 at a cost of $xM each with a total depth of 2,000 meters
  2. Development Wells        5 at a cost of $yM each etc....
  3. Extension Wells             1 at a cost of $xM etc...

Based on the above plan and taking into account the current stock levels a "Inventory Purchase Plan" was designed, which is basicly an Material Requirement Plan;

  1. How many meters of 30inch, 20inch, 13 3/8 inch etc..
  2. How many Diamond drill bits
  3. How many spare parts...
  4. etc...etc....

Given the $-value of these items synchronizing the purchase --> receipt in stock --> release to drilling was critical to minimize working capital and in some instances the tubulars never made it to stock but were loaded from in-bound ship to release/despatch ship and off to the offshore drilling site.

Choosing ROP or MRP

High Value (30% of the items = 70% of total value)- Diamond bits and high grade steel tubulars were classified as High Value items and kept indoors and these were mainly imported from either USA or Japan. Despite their value, in a few instances, due to cancelling of a project items became obsolete and were scrapped.

Based on the above MRP was the principle used for Inventory Management.

Low and Medium (70% of the items = 30% of the value) - most of these items were purchased purchased on ROP basis and mainly from local distributor


Inventory Management - MRP

The Purchasing Environment was Dependent Demand by nature as it was fully dependent of the Wells to be drilled and this was pre-approved and agreed and planned, hence no surprises.

The nature of the supplies needed made the Inventory System was based on MRP for the most expensive (high quality)  parts and ROP for consumables (spare parts)

From a decision point of view;

[1] What Should be bought - this was the outcome of the Drilling Budget which got translated into "SKU" and "Quantity"

[2] Where should it be bought from - this was in many cased obvious Nippon Steel and in some cases from Germany

[3] When should it be bought - this was determined by the timing of the drilling activity and the ordering was placed as late as possible to minimize working capital

[4] How much should be bought - this was calculated by taking into account current stock levels and non-resevered quantities.

Operating Costs

Operating Costs of the Facilities were allocated to the wells drilled during the year, which made have a cost effective operation in place (close to the harbour), which had reduced storage costs and lower transportation/release costs. As the stock items were all steel they could be kept in stock for many years, provided they did not became obsolete.

Import - Custom Clearance ... - Fully loaded cost;

As all costs associated with the purchase were added to the initial purchase price - we needed to ensure that all costs were either available or estimate on the point of "release of material"

How did MRP work ?

  • Gross Requirement - Drilling Manager and Purchasing Department develop purchasing plan based on drilling plan of next year and the year after

  • Scheduled receipts - orders which have already been placed but still "in process" are taken into consideration, however in general orders were placed to meet specific "individual well" needs, hence

  • on hand inventory - this inventory was used to determine which items met the criteria's of the newly to be drilled wells and which quantities are "available" meaning not yet reserved for other drilling activity
  • Planned order release - from a Logistic point of view the wharehouse was located by the harbour which made "on and off" loading easy process. A so-called Requisition (called 777) was drafted complete with "Item" - "SKU number" - "Description" - "Quantity" - "Estimated Value". Whenever the complete batch was released from the wharehouse a copy (signed) came to myself for processing into the books and assigning to costs to the Drilling Project

Whenever "existing stock" was released/used - we applied the Average Price Principle.

Scheduling - Sequencing

Once the Drilling Manager and Purchasing Department had the approval for stock purchase it was the task of the Wharehouse Manager to provide an inventory and also to support in the scheduling of the material release plan for the year.

Material Release Plan

To avoid surprises each of the costly components were allocated to a drilling project in terms of quantity and loaded into the Material Release Plan, which resulted in gap in stock and sometimes in emergency situations, stock of one plan had to loaned to another project. In a view instances stock was transported from UK operations to support Netherlands operations as the journey from Nippon Steel to Ijmuiden (Netherlands) took too long.

Monitoring Control

This was the task of Wharehouse Manager and Storehouse Stock Analist (myself) as stock levels needed to be reconciled on a 80/20 basis, meaning the most expensive items were 100% reconcilled and monitored and since their size is massive, it is easy to determine their location (20 inch in diameter and 6 meter long). The same for Diamond drill bits, these were kept in-doors and boxed.

Sequencing Rules

This process required the Drilling Manager to clearly indicate which quality level was required;

  1. Condition 1 = Brand new
  2. Condition 2 = used with 75% value
  3. Condition 3 = used with 50% value

The nature of the well and it's geological charecteristics will determine which quality of tubulars are needed, hence customer priority was the main rule applied.

Spare Parts

The stock levels for Spare Parts were kept are critical levels, however the risk is that some items were never used which made them obsolete, hence often Stock levels were reviewed to determine if they are still needed or if they can be scrapped, as they occupied valueable space.

There have been instances where very expensive Diamond Drilling Bits which were ordered for a specific drilling programme, however was not needed not used. This stock item was too unique and could never be used again and it was scrapped for a fraction of the purchase price.


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Slack et al, 2006, "Operations and Process Management", Prentice Hall

Wally, 2009, Warwick MBA Study note on "Operations Management"

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